Description
Over the past decade, China has expanded its trade and investment ties with Latin America to unprecedented levels. This thesis econometrically investigates whether Chinese foreign direct investment (FDI) in Latin America and the trade flows between the two regions are substitutes or complements. I employ an augmented gravity model and country-level panel data that covers from 2001 to 2006. The trade flows are segregated into homogenous and differentiated goods to incorporate an additional element of specificity and to address the widely voiced concern that China is securing and extracting crucial natural resources while seeking new markets for its manufactured goods. The results indicate that Chinese FDI stock in Latin America increases exports and decreases imports of differentiated goods. This finding is consistent with the one-way trade flows predicted by the factor-proportions theory of international trade and suggests that Chinese FDI is vertical in nature and the production of Chinese goods is being integrated across countries. The results fail to confirm if the natural resource endowment of a Latin America country increases imports of homogenous goods into China.
